I’ll take a crack conceptually-apologize for this being a bit of a stream of consciousness.
If we assume some sort of rational expectations, a house is like a dividend paying stock (the dividends being the right to live in the house, which has some value). The value of the house, then, would be equal to the present value of cash flows, which I’d say are equal to expected rents over the time horizon (owners equivalent, or something like that), plus the value of the house discounted to the present at the current interest rate over the horizon (10 yr t-bill or something).
On that side of the equation (ignoriing financing), then, lower interest rates should increase the present value of the house, but this effect would be muted by the following: lower interest rates would drive lower future rents (assuming those are based on an expected return from the owner), which would also be based on a spread over inflation.
I plugged this into a very simple model that assumed inflation and rent increases of 3%/year, a T-Bill Rate of 6%, and made the assumption that the spread over inflation on the T-Bill is constant at 3%.
Under this scenario, the rising value of the house from a lower interest rate is almost exactly offset by the fact that it slows down the rate of growth in rents, and therefore, the house wealth gained is also a benefit lost in the sense that you were saving less on the rent you would have paid.
That would be a simple, yet quantitative support for your argument, Rich (the result actually surprised me a bit).
You’d still have the financing side of the equation, but you don’t value stocks based on the method of financing, you value them purely on the cash flows of the stock. I’d argue you should do the same here-it’s the cash flows that you are buying that drive price, not the method of financing. The rate reductions are reflected already in the present values calculation on the house.
There are obviously other considerations: The option to refinance, the potential for spreads over treasuries to change, psychological changes in buyer preferences for owning vs. renting, the fact that emotion can enter the market and that not all participants are acting rationally, etc. The recent bubble bears this out since the above would indicate that the abnormally low rates wouldn’t be a boon for prices-I’d argue that was psychology, not economics driven and that the economics can only explain the long-term gravitational pull toward a rational value
